Instructions for IRS Form 1065 Schedule M-3 - Net Income (Loss) Reconciliation for Certain Partnerships 2018

January 1, 2018 "Instructions For Irs Form 1065 Schedule M-3 - Net Income (loss) Reconciliation For Certain Partnerships" contain the latest filing requirements for the IRS-issued Form 1065. Download your copy of the instructions by clicking the link below.

IRS Form 1065 is a tax form issued by the United States Internal Revenue Service.

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2018
Department of the Treasury
Internal Revenue Service
Instructions for
Schedule M-3 (Form 1065)
Net Income (Loss) Reconciliation for Certain Partnerships
Who Must File
(Form 1065). If the filer chooses to
Section references are to the Internal Revenue
Code unless otherwise noted.
complete Schedule M-1 instead of
Any entity that files Form 1065 must file
completing Parts II and III of Schedule M-3
Future Developments
Schedule M-3 (Form 1065) if any of the
(Form 1065), line 1 of Schedule M-1 must
following is true.
equal line 11 of Part I of Schedule M-3
For the latest information about
1. The amount of total assets at the
(Form 1065).
developments related to Schedule M-3
end of the tax year reported on
(Form 1065) and its instructions, such as
For any part of Schedule M-3 (Form
Schedule L, line 14, column (d), is equal to
legislation enacted after they were
1065) that is completed, all columns must
$10 million or more.
published, go to IRS.gov/Form1065.
be completed, all applicable questions
2. The amount of adjusted total assets
must be answered, all numerical data
General Instructions
for the tax year is equal to $10 million or
requested must be provided, any
more. See Total Assets and Adjusted
statement required to support a line item
Total Assets below.
Applicable schedule and instructions.
must be attached and provide the
Use the 2018 Schedule M-3 (Form 1065)
3. The amount of total receipts for the
information required for that line item. Any
with these instructions for tax years ending
tax year is equal to $35 million or more.
partnership required to file Schedule M-3
December 31, 2018, through December
Total receipts is defined in the instructions
must check all boxes above Part I that
30, 2019. For previous tax years, see the
for Codes for Principal Business Activity
apply for the reason(s) for which the
applicable Schedule M-3 (Form 1065) and
and Principal Product or Service in the
Schedule M-3 is required to be filed. A
instructions. (For example, use the 2017
Instructions for Form 1065.
partnership not required to file
Schedule M-3 (Form 1065) with the 2017
4. An entity that is a reportable entity
Schedule M-3, but that is doing so
instructions for tax years ending
partner with respect to the partnership (as
voluntarily, should check box E above Part
December 31, 2017, through December
defined under these instructions) owns or
I.
30, 2018.)
is deemed to own, directly or indirectly, an
Total Assets and Adjusted
interest of 50% or more in the
Total Assets
Purpose of Schedule
partnership's capital, profit, or loss on any
day during the tax year of the partnership.
The partnership should figure its adjusted
Schedule M-3, Part I, asks certain
total assets using the Adjusted Total
A common trust fund or foreign
questions about the partnership's financial
Assets Worksheet, later.
partnership must file Schedule M-3 if it
statements and reconciles financial
meets any of the tests discussed above.
For purposes of determining for
statement net income (loss) for the
Schedule M-3 whether the partnership's
consolidated financial statement group to
Note. All references to a U.S. partnership
adjusted total assets (under these
income (loss) per the income statement
in these instructions refer to any entity
instructions) equal $10 million or more, the
for the partnership.
required to file Schedule M-3 (Form 1065),
partnership's total assets at the end of the
where appropriate.
Schedule M-3, Parts II and III, reconcile
tax year must be determined on an overall
financial statement net income (loss) for
accrual method of accounting unless both
Partnerships not required to file
the partnership (per Schedule M-3, Part I,
of the following apply: (a) the tax return of
Schedule M-3 may voluntarily file
line 11) to line 1 of the Analysis of Net
the partnership is prepared using an
Schedule M-3.
Income (Loss) found on Form 1065.
overall cash method of accounting, and
Completing Schedule M-3
(b) the partnership doesn't prepare
Where To File
financial statements using, and isn't
(Form 1065)
included in financial statements prepared
If the partnership is required to file (or
Form 1065 filers that are required to file
on, an accrual basis.
voluntarily files) Schedule M-3 (Form
Schedule M-3 (Form 1065) and have at
1065), the partnership must file Form
least $50 million total assets at the end of
See the instructions for Schedule M-3,
1065 and all attachments and schedules,
the tax year must complete Schedule M-3
Part I, line 1, regarding non-tax-basis
including Schedule M-3 (Form 1065), at
(Form 1065) entirely.
income statements and related
the following address.
non-tax-basis balance sheets to be used
Form 1065 filers that (a) are required to
in the preparation of Schedule M-3 and
Department of the Treasury
file Schedule M-3 (Form 1065) and have
the related non-tax-basis balance sheets
less than $50 million total assets at the
to be used in the preparation of
end of the tax year or (b) aren't required to
Internal Revenue Service Center
Schedule L.
file Schedule M-3 (Form 1065) and
voluntarily file Schedule M-3 (Form 1065)
In the case of a partnership year ending
Ogden, UT 84201-0011
must either (i) complete Schedule M-3
because of a section 708 termination, the
(Form 1065) entirely or (ii) complete
total assets of the partnership at the end of
Schedule M-3 (Form 1065) through Part I
the year for determining the requirement
and complete Schedule M-1 instead of
to file Schedule M-3 are determined
completing Parts II and III of Schedule M-3
immediately before the section 708
Nov 16, 2018
Cat. No. 38800Y
2018
Department of the Treasury
Internal Revenue Service
Instructions for
Schedule M-3 (Form 1065)
Net Income (Loss) Reconciliation for Certain Partnerships
Who Must File
(Form 1065). If the filer chooses to
Section references are to the Internal Revenue
Code unless otherwise noted.
complete Schedule M-1 instead of
Any entity that files Form 1065 must file
completing Parts II and III of Schedule M-3
Future Developments
Schedule M-3 (Form 1065) if any of the
(Form 1065), line 1 of Schedule M-1 must
following is true.
equal line 11 of Part I of Schedule M-3
For the latest information about
1. The amount of total assets at the
(Form 1065).
developments related to Schedule M-3
end of the tax year reported on
(Form 1065) and its instructions, such as
For any part of Schedule M-3 (Form
Schedule L, line 14, column (d), is equal to
legislation enacted after they were
1065) that is completed, all columns must
$10 million or more.
published, go to IRS.gov/Form1065.
be completed, all applicable questions
2. The amount of adjusted total assets
must be answered, all numerical data
General Instructions
for the tax year is equal to $10 million or
requested must be provided, any
more. See Total Assets and Adjusted
statement required to support a line item
Total Assets below.
Applicable schedule and instructions.
must be attached and provide the
Use the 2018 Schedule M-3 (Form 1065)
3. The amount of total receipts for the
information required for that line item. Any
with these instructions for tax years ending
tax year is equal to $35 million or more.
partnership required to file Schedule M-3
December 31, 2018, through December
Total receipts is defined in the instructions
must check all boxes above Part I that
30, 2019. For previous tax years, see the
for Codes for Principal Business Activity
apply for the reason(s) for which the
applicable Schedule M-3 (Form 1065) and
and Principal Product or Service in the
Schedule M-3 is required to be filed. A
instructions. (For example, use the 2017
Instructions for Form 1065.
partnership not required to file
Schedule M-3 (Form 1065) with the 2017
4. An entity that is a reportable entity
Schedule M-3, but that is doing so
instructions for tax years ending
partner with respect to the partnership (as
voluntarily, should check box E above Part
December 31, 2017, through December
defined under these instructions) owns or
I.
30, 2018.)
is deemed to own, directly or indirectly, an
Total Assets and Adjusted
interest of 50% or more in the
Total Assets
Purpose of Schedule
partnership's capital, profit, or loss on any
day during the tax year of the partnership.
The partnership should figure its adjusted
Schedule M-3, Part I, asks certain
total assets using the Adjusted Total
A common trust fund or foreign
questions about the partnership's financial
Assets Worksheet, later.
partnership must file Schedule M-3 if it
statements and reconciles financial
meets any of the tests discussed above.
For purposes of determining for
statement net income (loss) for the
Schedule M-3 whether the partnership's
consolidated financial statement group to
Note. All references to a U.S. partnership
adjusted total assets (under these
income (loss) per the income statement
in these instructions refer to any entity
instructions) equal $10 million or more, the
for the partnership.
required to file Schedule M-3 (Form 1065),
partnership's total assets at the end of the
where appropriate.
Schedule M-3, Parts II and III, reconcile
tax year must be determined on an overall
financial statement net income (loss) for
accrual method of accounting unless both
Partnerships not required to file
the partnership (per Schedule M-3, Part I,
of the following apply: (a) the tax return of
Schedule M-3 may voluntarily file
line 11) to line 1 of the Analysis of Net
the partnership is prepared using an
Schedule M-3.
Income (Loss) found on Form 1065.
overall cash method of accounting, and
Completing Schedule M-3
(b) the partnership doesn't prepare
Where To File
financial statements using, and isn't
(Form 1065)
included in financial statements prepared
If the partnership is required to file (or
Form 1065 filers that are required to file
on, an accrual basis.
voluntarily files) Schedule M-3 (Form
Schedule M-3 (Form 1065) and have at
1065), the partnership must file Form
least $50 million total assets at the end of
See the instructions for Schedule M-3,
1065 and all attachments and schedules,
the tax year must complete Schedule M-3
Part I, line 1, regarding non-tax-basis
including Schedule M-3 (Form 1065), at
(Form 1065) entirely.
income statements and related
the following address.
non-tax-basis balance sheets to be used
Form 1065 filers that (a) are required to
in the preparation of Schedule M-3 and
Department of the Treasury
file Schedule M-3 (Form 1065) and have
the related non-tax-basis balance sheets
less than $50 million total assets at the
to be used in the preparation of
end of the tax year or (b) aren't required to
Internal Revenue Service Center
Schedule L.
file Schedule M-3 (Form 1065) and
voluntarily file Schedule M-3 (Form 1065)
In the case of a partnership year ending
Ogden, UT 84201-0011
must either (i) complete Schedule M-3
because of a section 708 termination, the
(Form 1065) entirely or (ii) complete
total assets of the partnership at the end of
Schedule M-3 (Form 1065) through Part I
the year for determining the requirement
and complete Schedule M-1 instead of
to file Schedule M-3 are determined
completing Parts II and III of Schedule M-3
immediately before the section 708
Nov 16, 2018
Cat. No. 38800Y
termination and any actual or deemed
determine adjusted total assets for 2018),
31, 2018. T has total assets at the end of
contribution or distribution of the
an amount that isn't less than the total
the tax year reported on Schedule L,
partnership assets under the provisions of
liabilities at the end of 2018 reported to R's
line 14, column (d), of $7.5 million. The
section 708.
partners on Schedules K-1. Because R
amount of total liabilities at the end of
has adjusted total assets of $10 million or
2018 reported to T's partners on
more for its tax year ending December 31,
Schedules K-1 is $5 million. T made no
2018, R must file Schedule M-3 for 2018
distributions during 2018 reflected on
Example 1.
and either (i) complete Schedule M-3
Schedule M-2, line 6. T didn't report a loss
1. U.S. partnership A, a limited liability
entirely, or (ii) complete Schedule M-3
for 2018 on Schedule M-2, line 3. T didn't
company (LLC), owns 60% of the income
through Part I and complete Schedule M-1
report adjustments to capital on
and capital of U.S. partnership B, also an
instead of completing Parts II and III of
Schedule M-2, line 7, but did report a
LLC. For its tax year ending December 31,
Schedule M-3.
negative adjustment of ($3 million) on
2018, A prepares non-tax-basis GAAP
Schedule M-2, line 4. T has adjusted total
4. Same facts as in Example 1.3
(generally accepted accounting principles)
assets for 2018 in the tentative amount of
except that the amount of total liabilities at
consolidated financial statements with B
$10.5 million, the sum of $7.5 million plus
the end of 2018 reported to R's partners
that report total assets at the end of the
$3 million (the amount of the negative
on Schedules K-1 is $11 million. R made
year of $12 million. A files Form 1065 and
adjustment stated as a positive amount
distributions of $1.5 million during 2018 as
reports on its non-tax-basis
that must be added back to determine
reflected on Schedule M-2, line 6. R has
unconsolidated GAAP Schedule L total
adjusted total assets for 2018), an amount
adjusted total assets for 2018 equal to $11
assets at the end of the year of $7 million.
that isn't less than the total liabilities at the
million, the greater of the tentative amount
The $7 million total includes $3 million for
end of 2018 reported to T's partners on
of $9 million, the sum of $7.5 million plus
its investment in B under the equity
Schedules K-1. Because T has adjusted
$1.5 million (the amount of distributions
method of accounting. The amount of total
total assets of $10 million or more for its
that must be added back to determine
liabilities at the end of the year reported to
tax year ending December 31, 2018, T
adjusted total assets for 2018), or $11
A's partners on Schedules K-1 is $5
must file Schedule M-3 for 2018 and either
million (the amount of the total liabilities at
million. A made distributions of $1 million
(i) complete Schedule M-3 entirely, or (ii)
the end of 2018 reported to R's partners
during the year reflected on
complete Schedule M-3 through Part I and
on Schedules K-1). Because R has
Schedule M-2, line 6. The amount of A's
complete Schedule M-1 instead of
adjusted total assets of $10 million or
adjusted total assets is $8 million for the
completing Parts II and III of
more for its tax year ending December 31,
tax year. A has total receipts for the tax
Schedule M-3.
2018, R must file Schedule M-3 for 2018
year of $15 million. A has no reportable
and either (i) complete Schedule M-3
7. Z has $50 million in total assets at
entity partners (as defined under
entirely, or (ii) complete Schedule M-3
the end of its 2018 tax year ending
Reportable Entity Partner Reporting
through Part I and complete Schedule M-1
December 31, 2018, and files Form 1065.
Responsibilities, later). A isn't required to
instead of completing Parts II and III of
Z must file Schedule M-3 and complete it
file Schedule M-3 under any of the four
Schedule M-3.
entirely.
tests discussed earlier. A may voluntarily
5. S, a U.S. partnership, files Form
file Schedule M-3 for the tax year. If A
Reportable Entity Partner
1065 for the tax year ending December
doesn't file Schedule M-3, it must
Reporting Responsibilities
31, 2018. S has total assets at the end of
complete Schedule M-1. If A files
2018 reported on Schedule L, line 14,
Schedule M-3, it must either (i) complete
For the purposes of these instructions, a
column (d), of $7.5 million. The amount of
Schedule M-3 entirely, or (ii) complete
reportable entity partner with respect to a
total liabilities at the end of 2018 reported
Schedule M-3 through Part I and complete
partnership filing Form 1065 is an entity
to S's partners on Schedules K-1 is $5
Schedule M-1 instead of completing Parts
that:
million. S made no distributions during
II and III of Schedule M-3.
Owns or is deemed to own, directly or
2018 reflected on Schedule M-2, line 6. S
2. Same facts as in Example 1.1
indirectly, under these instructions, a 50%
reported a loss of ($3 million) for 2018 on
except that A has total receipts for 2018 of
or greater interest in the income, loss, or
Schedule M-2, line 3. S didn't report
$40 million. A must file Schedule M-3 for
capital of the partnership on any day of the
adjustments to capital on Schedule M-2,
2018 and either (i) complete
tax year; and
line 4 or 7. S has adjusted total assets for
Schedule M-3 entirely, or (ii) complete
Was required to file Schedule M-3 on its
2018 in the tentative amount of $10.5
Schedule M-3 through Part I and complete
most recently filed U.S. federal income tax
million, the sum of $7.5 million plus $3
Schedule M-1 instead of completing Parts
return or return of income filed prior to that
million (the amount of the loss stated as a
II and III of Schedule M-3.
day.
positive amount that must be added back
3. R, a U.S. partnership, files Form
to determine adjusted total assets for
For the purposes of these instructions,
1065 for the tax year ending December
2018). This tentative amount is compared
the following rules apply.
31, 2018. R has total assets at the end of
to the total liabilities at the end of 2018 as
the tax year reported on Schedule L,
1. The parent corporation of a
reported to S's partners on Schedules K-1,
line 14, column (d), of $7.5 million. The
consolidated tax group is deemed to own
and the greater of the two amounts is
all corporate and partnership interests
aggregate amount of total liabilities at the
considered the adjusted total assets.
owned or deemed to be owned under
end of 2018 reported to R's partners on
Because S has adjusted total assets of
Schedules K-1 is $5 million. R made
these instructions by any member of the
$10 million or more for its tax year ending
distributions of $3 million during 2018
tax consolidated group.
December 31, 2018, S must file
reflected on Schedule M-2, line 6. R didn't
2. The owner of a disregarded entity
Schedule M-3 for 2018 and either (i)
report a loss for 2018 on Schedule M-2,
is deemed to own all corporate and
complete Schedule M-3 entirely, or (ii)
line 3. R didn't report adjustments to
partnership interests owned or deemed to
complete Schedule M-3 through Part I and
capital on Schedule M-2, lines 4 or 7. R
complete Schedule M-1 instead of
be owned under these instructions by the
has adjusted total assets for 2018 in the
disregarded entity.
completing Parts II and III of
tentative amount of $10.5 million, the sum
Schedule M-3.
3. The owner of 50% or more of a
of $7.5 million plus $3 million (the amount
corporation by vote on any day of the
6. T, a U.S. partnership, files Form
of distributions that must be added back to
1065 for the tax year ending December
corporation tax year is deemed to own all
-2-
50% or more of each corporation by vote
and therefore is deemed to own 20% of K
Keep for Your Records
Adjusted Total Assets Worksheet
on September 16, 2018. P is therefore
deemed to own 50% of K on September
1. Enter total assets at the end of the tax year on Schedule L,
16, 2018. P owns or is deemed to own,
line 14, column (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.
directly or indirectly, under these
2. Enter capital distributions on Schedule M-2, lines 6a and 6b
instructions 50% or more of K on
(shown as a positive amount)
. . . . . . . . . . . . . . . . . . . . .
2.
September 16, 2018, and was required to
3. Enter any loss reported on Schedule M-2, line 3 (shown as a
file Schedule M-3 on its most recently filed
positive amount) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.
U.S. income tax return filed before that
4. Enter the amount of any positive adjustment on Schedule M-2,
date. Therefore, P is a reportable entity
line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.
partner of K as of September 16, 2018. On
5. Enter the amount of any negative adjustment on Schedule M-2,
October 5, 2018, P reports to K, as it is
line 4 (shown as a positive amount)
. . . . . . . . . . . . . . . . .
5.
required to do, that P is a reportable entity
6. Add lines 1 through 5
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.
partner as of September 16, 2018,
7. Enter combined total liabilities (recourse and nonrecourse) on all
deemed to own under these instructions a
Schedules K-1 (Form 1065), Part II, Item K . . . . . . . . . . . . .
7.
50% interest in K. K is therefore required
8. Adjusted Total Assets. Enter the greater of line 6 or
to file Schedule M-3 when it files its Form
line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.
1065 for its tax year ending December 31,
2018.
Note. For line 2 above, if the partnership reflects partner capital account changes resulting from the sale of a
partnership interest on Schedule M-2 as matching contributions and distributions (on lines 2a and 2b and on lines 6a
2. Throughout 2018, A, a limited
and 6b, respectively), reduce the amounts shown on lines 6a and 6b by such matching amounts.
liability company (LLC) filing Form 1065
for calendar year 2018, owns, as its only
asset, 50% of each of B, C, D, and E, each
corporate and partnership interests owned
7. Date with respect to which it is
also an LLC filing Form 1065 for calendar
or deemed to be owned under these
reporting a change in its ownership
year 2018. A is owned by individuals and
instructions by the corporation during the
interest in the partnership, if applicable.
S corporations not required to file
corporation tax year.
Schedule M-3 for 2017, 2018, or 2019. B,
8. The interest in the partnership it
C, D, and E are owned by A and by
4. The owner of 50% or more of
owns or is deemed to own in the
individuals and S corporations not
partnership income, loss, or capital on any
partnership, directly or indirectly (as
required to file Schedule M-3 for 2017,
day of the partnership tax year is deemed
defined under these instructions) as of the
2018, or 2019. For the partnership tax
to own all corporate and partnership
date with respect to which it is reporting.
years ending December 31, 2018, each of
interests owned or deemed to be owned
9. Any change in that interest as of the
B, C, D, and E has no year-end liabilities,
under these instructions by the
date with respect to which it is reporting.
$3 million in total assets and $6 million in
partnership during the partnership tax
The reportable entity partner must
adjusted total assets (the difference equal
year.
retain copies of required reports it makes
to the distributions by each in 2018), and
5. The beneficial owner of 50% or
to partnerships under these instructions.
2018 total receipts of $20 million. As of
more of the beneficial interest of a trust or
Each partnership must retain copies of the
December 31, 2018, no owner, direct or
nominee arrangement on any day of the
required reports it receives under these
indirect, of B, C, D, or E was required to
trust or nominee arrangement tax year is
instructions from reportable entity
file Schedule M-3 on its most recently filed
deemed to own all corporate and
partners.
U.S. income tax return or return of income.
partnership interests owned or deemed to
None of B, C, D, or E is required to file
be owned under these instructions by the
For more information, see
Item D.
Schedule M-3 for 2018. For the
trust or nominee arrangement.
Reportable Entity
Partner, later.
partnership tax year ending December 31,
A reportable entity partner with respect
2018, A has no year-end liabilities, $6
Example 2.
to a partnership (as defined above) must
million in total assets and $12 million in
1. P, a U.S. corporation, is the parent
report the following to the partnership
adjusted total assets (the difference equal
of a financial consolidation group with 50
within 30 days of first becoming a
to the distributions in 2018), and 2018 total
domestic subsidiaries, DS1 through DS50,
reportable entity partner and, after first
receipts of $6 million. As of December 31,
and 50 foreign subsidiaries, FS1 through
reporting to the partnership under these
2018, no owner, direct or indirect, of A
FS50, all 100% owned on September 16,
instructions, thereafter within 30 days of
was required to file Schedule M-3 on its
2018. On September 15, 2018, P filed a
the date of any change in the interest it
most recently filed U.S. income tax return.
consolidated tax return on Form 1120 and
owns or is deemed to own, directly or
A must file Schedule M-3 when it files its
was required to file Schedule M-3 for the
indirectly, under these instructions, in the
Form 1065 for 2018 because A has
tax year ending December 31, 2017. On
partnership.
adjusted total assets of $10 million or
September 16, 2018, DS1, DS2, DS3,
more.
1. Name.
FS1, and FS2 each acquire a 10%
3. Same ownership facts as in
partnership interest in partnership K,
2. Mailing address.
Example 2.2 continued to calendar year
which files Form 1065 for the tax year
3. Employer identification number
2019. On March 3, 2019, A files its Form
ending December 31, 2018. P is deemed
(EIN), if applicable.
1065 with Schedule M-3 for the
to own, directly or indirectly, under these
partnership tax year ending December 31,
4. Entity or organization type.
instructions all corporate and partnership
2018. As of March 4, 2019, A becomes a
interests of DS1, DS2, and DS3, as the
5. State or country in which it is
reportable entity partner with respect to
parent of the tax consolidation group, and
organized.
any partnership in which it owns or is
therefore is deemed to own 30% of K on
6. Date on which it first became a
deemed to own, directly or indirectly,
September 16, 2018. P is deemed to own,
reportable entity partner.
under these instructions a 50% or greater
directly or indirectly, under these
interest in the income, loss, or capital of
instructions all corporate and partnership
the partnership. A owns 50% of each of B,
interests of FS1 and FS2 as the owner of
-3-
C, D, and E and is therefore a reportable
assets. If the partnership doesn't prepare
liabilities section of Schedule L. A doesn't
entity partner with respect to each as of
non-tax-basis financial statements,
report its $4 million negative capital
March 4, 2019, the day after it filed its
Schedule L must be based on the
account in B on Schedule L.
2018 Form 1065 with a required
partnership's books and records. The
Example 4. Same facts as in
Schedule M-3. On March 20, 2019, A
Schedule L balance sheet can show
Example 3, except that B is an LLC and A
reports to B, C, D, and E, as it is required
tax-basis balance sheet amounts if the
is a member of B. None of B's liabilities
to do within 30 days of March 4, that it is a
partnership is allowed to use books and
are recourse with respect to A. A isn't
reportable entity partner owning a 50%
records for Schedule M-3 and the
obligated to restore any deficit capital
interest. Each of B, C, D, and E is required
partnership's books and records reflect
account in B. A prepares non-tax-basis
to file Schedule M-3 for 2019 because
only tax-basis amounts.
income statements and balance sheets
each has a reportable entity partner. A will
under an accounting method that requires
determine if it must file Schedule M-3 for
Generally, total assets at the beginning
the use of the equity method of accounting
2019 based on its separate facts for 2019.
of the year (Schedule L, line 14, column
to account for its investment in B. On its
(b)) must equal total assets at the close of
4. Same ownership facts as in
non-tax-basis books and records, A
the prior year (Schedule L, line 14, column
Example 2.2 for calendar year 2018,
initially reports $2 million as its investment
(d)). For each Schedule L balance sheet
except that A is owned 50% by
in B, the amount of A's capital contribution.
item reported for which there is a
corporation Z that was first required to file
A then reduces its $2 million investment in
difference between the current opening
Schedule M-3 for its corporate tax year
B by its share of B's allocable losses.
balance sheet amount and the prior
ending December 31, 2017, and that filed
Because A's allocable share of B's losses
closing balance sheet amount, attach a
its Form 1120 with Schedule M-3 for 2017
is $6 million, A's investment in B under the
statement that reports the balance sheet
on September 15, 2018. As of September
equity method is reduced to $0. Because
item, the prior closing amount, the current
16, 2018, Z was a reportable entity partner
A isn't liable to repay any of B's liabilities
opening amount, and a short explanation
with respect to A and, through A, with
and isn't obligated to restore any deficit
of the change. Such reasons for these
respect to B, C, D, and E. On October 5,
with respect to its capital account in B, A
differences include technical terminations
2018, Z reports to A, B, C, D, and E, as it
doesn't report any of B's liabilities on A's
and mergers.
is required to do within 30 days of
Schedule L balance sheet.
September 16, that Z is a reportable entity
Entity Considerations for
partner directly owning (with respect to A)
For purposes of measuring total assets
Schedule M-3
or deemed to own indirectly (with respect
at the end of the year, the partnership's
to B, C, D, and E) a 50% interest.
assets may not be netted or reduced by
For purposes of Schedule M-3, references
Therefore, because Z was a reportable
partnership liabilities. In addition, total
to the classification of an entity (for
entity partner for 2018, each of A, B, C, D,
assets may not be reported as a negative
example, as a corporation, a partnership,
and E is required to file Schedule M-3 for
amount. If Schedule L is prepared on a
or a trust) are references to the treatment
2018, regardless of whether it would
non-tax-basis method, an investment in
of the entity for U.S. income tax purposes.
otherwise be required to file Schedule M-3
another partnership may be shown as
An entity that generally is disregarded as
for that year.
appropriate under the partnership's
separate from its owner for U.S. income
non-tax-basis method of accounting,
tax purposes (disregarded entity) must not
Other Form 1065 Schedules
including, if required by the partnership's
be separately reported on Schedule M-3
reporting methodology, the equity method
Affected by Schedule M-3
except, if required, on Part I, line 7a or 7b.
of accounting for investments. If
On Schedule M-3, Parts II and III, any item
Requirements
Schedule L is prepared on a tax-basis
of income, gain, loss, deduction, or credit
method, an investment by the partnership
Schedule L
of a disregarded entity must be reported
in another partnership must be shown as
as an item of its owner. In particular, the
If a non-tax-basis income statement and
an asset and measured by the
income or loss of a disregarded entity
related non-tax-basis balance sheet are
partnership's adjusted basis in its
must not be reported on Part II, line 7, 8, or
prepared for any purpose for a period
partnership interest. Any liabilities
9 as from a separate partnership or other
ending with or within the tax year,
contributing to such adjusted basis must
pass-through. The financial statement
Schedule L must be prepared showing
be shown on Schedule L as partnership
income or loss of a disregarded entity is
non-tax-basis amounts. See the
liabilities.
included on Part I, line 7a or 7b, only if its
discussion in the instructions for
financial statement income or loss is
Example 3. A, a limited liability
Schedule M-3, Part I, line 1, of
included on Part I, line 11, but not on Part
company (LLC), files Form 1065 for
non-tax-basis income statements and
I, line 4a.
calendar year 2018. B, a general
related non-tax-basis balance sheets
partnership, also files Form 1065 for
prepared for any purpose and the impact
Specific Instructions
calendar year 2018. A is a general partner
on the selection of the income statement
in B. A's capital account in B at the close
used for Schedule M-3 and the related
of 2018 is negative $4 million. This reflects
non-tax-basis balance sheet amounts that
Item D. Reportable Entity
A's 2018 contribution to B's capital of $2
must be used for Schedule L.
million reduced by A's share of 2018
Partner
losses passing through to it from B, $6
Total assets at the end of the tax year
million. A's adjusted basis in B on
On Schedule M-3, page 1, if the
shown on Schedule L, line 14, column (d),
December 31, 2018, is $16 million, its $4
partnership has any reportable entity
must equal the total assets of the
partners for the year, check Item D. A
million negative tax capital account in B
partnership as of the last day of the tax
plus its $20 million share of B's liabilities
partnership must report the name, EIN (if
year, and must be the same total assets
under section 752. A prepares only
applicable), and maximum percentage of
reported by the partnership in the
tax-basis income statements and balance
actual or deemed ownership of each
non-tax-basis financial statements, if any,
sheets. On its Schedule L, A reports as an
reportable entity partner if there are one or
used for Schedule M-3. If the partnership
two reportable entity partners for the tax
asset the adjusted basis of its investment
prepares non-tax-basis financial
in B, $16 million. A also reports its $20
year of the partnership, or, if there are
statements, Schedule L must report the
million share of B's liabilities in the
more than two reportable entity partners
non-tax-basis financial statement total
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for the tax year of the partnership, of the
“Yes” for line 1a and use that income
for its own tax return and must report on its
two reportable entity partners with the
statement for Schedule M-3. If Form 10-K
own Schedule M-3, as appropriate, the
largest maximum percentage of actual or
isn't filed and a non-tax-basis income
amount for the partnership's net income
deemed ownership for the tax year of the
statement is prepared that is a certified
(loss) that is equal to the amount included
partnership. The maximum percentage of
non-tax-basis income statement for the
and removed in the entity parent's
actual or deemed ownership for a
period ending with or within the tax year,
Schedule M-3, Part I. However, if in the
reportable entity partner for a tax year of
the partnership must check “Yes” for
circumstances described immediately
the partnership is the maximum
line 1b and use that income statement for
above, the partnership does have
percentage interest owned or deemed
Schedule M-3. If Form 10-K isn't filed and
separate non-tax-basis financial
owned under these instructions by the
no certified non-tax-basis income
statements (certified or otherwise) of its
reportable entity partner in the
statement is prepared but an unaudited
own, independent of the amount of the
partnership's capital, profit, or loss on any
non-tax-basis income statement is
partnership's net income included in the
day during the tax year of the partnership.
prepared for the period ending with or
consolidated financial statements with the
within the tax year, the partnership must
entity parent, the partnership must answer
The reportable entity partner must
check “Yes” for line 1c and use that
questions 1a, 1b, and 1c, as appropriate,
retain copies of required reports it makes
income statement for Schedule M-3.
for its own tax return, based on its own
to partnerships under these instructions.
separate non-tax-basis income statement,
Each partnership must retain copies of the
Order of priority in accounting stand-
and must report on line 4a the net income
required reports it received under these
ards. If no Form 10-K is filed and two or
(loss) amounts shown on its separate
instructions from reportable entity
more non-tax-basis income statements
income statement.
partners. See Reportable Entity Partner
are both certified non-tax-basis income
Reporting Responsibilities, earlier.
Lines 2 and 3. Questions
statements for the period, the income
statement prepared according to the
Regarding Income Statement
following order of priority in accounting
Part I. Financial
Period and Restatements
standards must be used.
Information and Net
Enter the beginning and ending dates on
1. U.S. Generally Accepted
line 2 for the partnership's annual income
Income (Loss)
Accounting Principles (GAAP).
statement period ending with or within the
Reconciliation
2. International Financial Reporting
current tax year.
Standards (IFRS).
The questions on lines 3a and 3b,
Line 1. Questions Regarding
3. Any other International Accounting
regarding income statement restatements,
the Type of Income Statement
Standards (IAS).
refer to the worldwide consolidated
Prepared
4. Any regulatory accrual accounting.
income statement issued by the
partnership filing Form 1065 and used to
For lines 1 through 11, use only the
5. Any other accrual accounting
prepare Schedule M-3. Answer “Yes” on
financial statements of the U.S.
standard.
lines 3a and/or 3b if the partnership's
partnership filing Form 1065. If the U.S.
6. Section 704(b) book accounting.
annual income statement has been
partnership filing Form 1065 is controlled
7. Any other fair market value
restated for any reason. Attach a short
by another entity, the U.S. partnership
reporting standard.
statement of the reasons for the
must use for its Schedule M-3, Part I, its
8. Any cash basis standard.
restatement in net income for each annual
own financial statements and not the
income statement period that is restated,
financial statements of the controlling
If no non-tax-basis income statement is
including the original amount and restated
entity.
certified and two or more non-tax-basis
amount of each annual statement period's
income statements are prepared, the
net income. The attached statement isn't
Non-Tax-Basis Financial
income statement prepared according to
required to report restatements on an
Statements and Tax-Basis
the first listed of the accounting standards
entity-by-entity basis.
above must be used.
Financial Statements
Line 4. Worldwide Consolidated
A tax-basis income statement is allowed
If no non-tax-basis financial statements
Net Income (Loss) per Income
for Schedule M-3 and a tax-basis balance
are prepared for the U.S. partnership filing
Statement
sheet for Schedule L only if neither
Schedule M-3, the U.S. partnership must
non-tax-basis income statement nor a
check “No” on questions 1a, 1b, and 1c,
Report on line 4a the worldwide
non-tax-basis balance sheet were
skip lines 2 through 3b, and enter the net
consolidated net income (loss) per the
prepared for any purpose and the books
income (loss) per the books and records
income statement (or books and records,
and records of the partnership reflect only
of the U.S. partnership on line 4a.
if applicable) of the partnership.
tax-basis amounts. The partnership is
In completing Schedule M-3, the
deemed to have non-tax-basis income
Consolidated Financial Statements
partnership must use financial statement
statements and the related non-tax-basis
amounts from the financial statement type
If a partnership filing a Schedule M-3
balance sheets for the current tax year for
checked “Yes” on line 1, or from its books
(a) is included in the non-tax-basis
purposes of Schedule M-3 and
and records if line 1c is checked “No.” If
consolidated financial statements of a
Schedule L if such non-tax-basis financial
line 1a is checked “Yes,” report on line 4a
group (consolidated financial statement
statements were prepared for and
the net income amount reported in the
group) with an entity parent filing a U.S tax
presented to management, creditors,
income statement presented to the SEC
return and Schedule M-3, (b) has its
members or partners, government
on the partnership's Form 10-K.
income (loss) included and removed by
regulators, or any other third parties for a
the entity parent on that entity parent's
If a partnership prepares non-tax-basis
period ending with or within the tax year.
Schedule M-3, Part I, and (c) doesn't have
financial statements, the amount on
If a Form 10-K is filed with the
a separate non-tax-basis financial
line 4a must equal the financial statement
statement (certified or otherwise) of its
Securities and Exchange Commission
net income (loss) for the income statement
own, the partnership must answer
(SEC) for the period ending with or within
period ending with or within the tax year as
questions 1a, 1b, and 1c as appropriate
the tax year, the partnership must check
indicated on line 2.
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Download Instructions for IRS Form 1065 Schedule M-3 - Net Income (Loss) Reconciliation for Certain Partnerships 2018

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